TEBOGO NALEDI: The opportunity to drive impact in listed markets

Historically, impact investing has largely been associated with private or unlisted investments into the likes of renewable energy, education, healthcare or affordable housing projects.

These projects have immediate and direct environmental and social impacts. Within listed markets, on the other hand, investors have readily influenced governance practices, but environmental and social impacts have been more difficult to effect and quantify.

About 98% of all SA retirement assets are invested in listed markets (with the largest single asset class allocation being to listed equity). When we consider that it is the investment of these savings that drives future economic growth, asset managers need to integrate more environmental, social and governance (ESG) considerations into their investment decisions. This points to the need to have universally accepted frameworks for defining impact.

One of these frameworks is the UN sustainable development goals (SDGs), which aim to address social inequality, protect the environment and promote strong corporate governance. They speak to the economic system that we are trying to shape and provide a strong framework in which we can operate and measure impact. In addition to the SDG framework, this thinking is supported by local regulators, with regulation 28 of the Pensions Fund Act stating that ESG considerations be incorporated in all investment decisions and in the ownership of all assets that we hold. 

Integrating impact thinking into listed equity portfolios is broadly done in two ways. We can invest in companies whose business operations make a direct positive contribution, for instance renewable energy-related businesses, providers of quality education or large employers. We can also favour listed companies seeking to reduce harmful practices, like combating water or air pollution or employers with sound employee wellbeing policies.

In line with our philosophy of taking an active, high-conviction approach to share selection we need to be sure that impact investing is real and measurable, and is not compromising financial returns. Here are some examples of how we have been measuring different aspects of the ESG impact of listed companies within our own investment approach.

Using cutting-edge research, we have developed an in-house proprietary ESG signal that provides a measure of the ESG risk profile of a listed company. Looking at a wide range of ESG factors, our ESG profile-scoring model gives us a sustainability lens through which to identify leaders and laggards in respect of ESG performance — at a company and portfolio level relative to a benchmark. This signal is continually reviewed to ensure it is consistently relevant in the ever-changing investment landscape, and that it adds enhanced return and value over time.

The profile score is used in varying ways across our investment processes. Most notably, we use it to offer our clients access to domestic and global portfolios with bespoke, mandated ESG tilts relative to a benchmark. These funds carry mandated carbon-related outcomes.

We track across a range of climate-risk metrics, including the percentage of a company’s revenue that is exposed to the primary production of fossil fuels and the carbon emissions generated as a result of their business operations. This enables us to track a portfolio’s stranded asset risk and carbon intensity over time. We use these insights to target low-carbon risk companies and to engage high-emitting companies on their long-term transition strategies. This is particularly important in a highly carbon-intensive listed equity market like SA.

Another factor we keenly track is companies’ B-BBEE progress relative to their sector peers and the benchmark. We use our B-BBEE data set to guide our company engagements for all the elements of the B-BBEE scorecard, from ownership and management control to enterprise and skill development, all of which are important activities to support transformation and economic growth within our society.

Our ESG data capability positions us to expand our client reporting beyond the risk-and-return attributes and to include aspects of the portfolio’s ESG impact. The ability to track and measure a range of ESG factors allows us to respond to issues by engaging companies to effect change. Broadly, we look at how we can influence policy or the direction of capital within those companies.

Studies in the US have shown that over time the subsequent returns generated by companies where engagements were successful were superior to those companies where engagements were unsuccessful. Motivated by these results, we teamed up with Stellenbosch University to conduct similar research on the subsequent performance of companies we engaged between 2015 and 2019. The majority of engagements were around remuneration issues and the research identified a positive relationship between successful engagements and those companies addressing the wage gap in the subsequent reporting years.

There is growing evidence that sustainable investing actually enhances returns. This intuitively makes sense as companies with strong governance structures and sustainable social and environmental business practices will be high-performance companies over time. And of course companies with strong and mutually beneficial relationships with their customers, stakeholders, communities and workforce, which are producing goods and services that speak to a sustainable world and that are better governed, will be better long-term investment opportunities.

As investors in the SA listed markets, we have a role to play in shaping and driving the impact agenda — for the benefit of our economy and to enhance future returns within our portfolios. This thinking shapes how we manage our clients’ assets, execute our stewardship functions and ultimately influences the products we develop.

• Naledi is MD of Old Mutual Investment Group.